Piercing the corporate veil for environmental liability – Chain of responsibility amendments passed by Queensland Parliament

On 22 April 2016, the Queensland Parliament passed the Environmental Protection (Chain of Responsibility) Act 2016 (Qld) (EPCOR Act), which proposes to introduce various measures to expand the scope of liability for corporates, their associated entities, officers, and financiers under the Environmental Protection Act 1994 (Qld) (EP Act).

For an overview of the Bill, see our previously published article.¹

The EPCOR Act makes a number of key changes to the original Bill, including:

• providing that the Department of Environment and Heritage Protection (DEHP) may consider whether a related person took all reasonable steps to ensure the company’s environmental compliance before issuing an environmental protection order (EPO),
• requiring that a related person significantly benefit financially, rather than merely benefit financially, to be subject to an environmental protection order under the ‘relevant connection’ test,
• limiting potential landowner liability for resource activities undertaken on land not owned by the proponent, and excluding landowners who obtain financial benefit through native title agreements, conduct and compensation agreements, or make good agreements for water bores from liability arising from that financial benefit,
• providing that the DEHP may impose a condition requiring a financial assurance when the ownership of the holding company changes (ie on a share sale), and
• introducing a power to make a guideline in relation to the issuing of EPOs to related persons, and requiring the DEHP to have regard to any such guideline.

The EPCOR Act commenced on 27 April 2016, with the operation of the provisions to be reviewed by the Minister in 2 years to decide whether they remain appropriate.

Due diligence obligations of related persons

The EPCOR Act provides that the DEHP, in deciding whether to issue an EPO to a related person, may consider whether the related person took all reasonable steps, having regard to the extent to which the person was in a position to influence the company’s conduct, to ensure the company:

• complied with its obligations under the EP Act, and
• made adequate provision to fund the rehabilitation and restoration of the land because of environmental harm from a relevant activity carried out by the company.

Firstly, this is not a mandatory consideration. The DEHP may choose to disregard whether a related person took all reasonable steps to ensure compliance should the circumstances warrant it.

Secondly, the introduction of a ‘reasonable steps’ obligation raises a range of questions as to what constitutes reasonable due diligence for an investor, financier or parent company in respect of another company’s environmental obligations.

Significant financial benefit

The EPCOR Act enables the DEHP to issue an EPO to a related person who is capable of significantly benefiting financially, or has significantly benefited financially, from the carrying out of the relevant activity by the company.

This is a higher threshold than what was included in the original Bill, which required only that the related person ‘benefit financially’.

Landowner liability

The EPCOR Act provides that a person is a related person of a company if, among other things:

• the person owns land on which the company carries out, or has carried out, a relevant activity other than a resource activity, or
• the person is an associated entity of the company under the Corporations Act 2001 (Cth), and owns land on which the company carries out, or has carried out, a relevant activity that is a resource activity.

This is considerably narrower than the original Bill, under which any landowner could be a related person of a company undertaking relevant activities on the land. The amendments mean that, where a company is undertaking resource activities on land which they do not own, the underlying landowner will not automatically be subject to liability as a related person.

The EPCOR Act also provides that a person who benefits financially under a native title or Aboriginal cultural heritage agreement, a conduct and compensation agreement, or a make good agreement for a water bore is not a related person by virtue of that financial benefit.

Financial Assurance condition on share sale

The original Bill allowed the DEHP to impose a condition on an environmental authority requiring a financial assurance at the time of any transfer of an environmental authority. The EPCOR Act provides the DEHP with the additional power to impose a condition requiring a financial assurance when the ownership of the holding company changes (ie a share sale).

Guidelines

In deciding whether to issue an EPO to a related person, the DEHP is required to have regard to any relevant statutory guidelines. A timeline for the release of any such guidelines has not yet been announced. The Minister has indicated that the guidelines will be developed in consultation with business and industry.  Concerned companies and investors should consider becoming involved in that process.

Recommendation

The EPCOR Act has significant implications for holders of environmental authorities, and for individuals, financiers and entities related to companies that hold environmental authorities.

Those entities will need to develop a clear understanding of the environmental liabilities of the relevant company, consider whether ‘reasonable steps’ are being taking to ensure the relevant company complies with its environmental obligations and address these risks in contractual arrangements.

Endnotes

1. Queensland government proposes significant amendments to state environmental legislation.